Using Net Present Value to Justify Expenditures
Its time to prepare the new budget and youre looking through the catalogues of new toys. That beautiful new vent analyzer sure would be a great addition. And how about a new spectrum analyzer or ultrasound voltmeter? The question is, though, how to justify the expenditure to the accounting department?
The best way to run new expenditures past the bean counters is to prove that the new piece of equipment will pay for itself. One method that helps you do that is the Net Present Value (NPV) concept to determine a minimum return on investment.
In accounting terms, NVP uses a desired rate of return on the investment. To simplify for nonaccountants, the rate of return should equal the total expenditures; in other words, the piece of equipment should at least pay for itself and break even.
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Dr. James Anderson is department chairman, Arts & Sciences, at Johnson & Wales Universitys Florida campus, where he also teaches Communication and Leadership Studies.